Should your next hire be an employee, contractor, or freelancer?

The explosion of the gig economy made self-employed talent available in practically all industries, yet many small businesses are still not aware of how this new talent can benefit them. Learn about the differences between employees, freelancers, and contractors, and how to decide which choice is best for your business.
Post by
YAC Team
May 2021
Should your next hire be an employee, contractor, or freelancer?

The differences between hiring an employee or a self-employed professional, such as a contractor or freelancer, affect all aspects of an employment relationship. It is important to understand the difference between the two categories and the legal and financial implications of each before making a decision.

More importantly, understanding the different categories of workers will allow you to find the best match for your business needs - there are advantages and disadvantages to each type of worker.

In Canada, the facts of the working relationship as a whole decide the employment status of each worker. All self-employed individuals must operate a business, which is most commonly a sole proprietorship.

If you aren't sure how to classify a worker's employment status, take a look at the list below for the factors to look at in making your determination and where to get help if you're unsure.

The basics of an employee relationship

What is an employee?

An employee is the worker in an employer-employee relationship. The details of this relationship are often outlined in an employment contract, and are regulated by legislation, such as the Ontario Employment Standards Act, as well as any other relevant acts, collective agreements, and the common law.

Typically, employees work exclusively for one company on a more permanent basis and receive a salary or hourly wage. They often have a direct reporting system, are provided tasks, and have set working hours.

The basics of a self-employed relationship

Unlike employees, self-employed individuals operate a business, and when you hire they are effectively engaging in a business relationship with you.

Both freelancers and contractors fall under the category of self-employed individuals, and most commonly operate a sole proprietorship, although they may also operate as corporations or other business structures.

What is a self-employed individual?

A self-employed individual is a professional who is offering their services and expertise to individuals and businesses.

There are two main categories of self-employed professionals: independent contractors and freelancers. While both are considered self-employed for classification purposes, there are some practical differences which will help determine which type of worker best suits the needs of your business.

What is the difference between a contractor vs a freelancer?

Before looking at the differences, consider the important similarities between contractors and freelances: both are self-employed, set their own hours, and have complete control over what work they accept.

In contrast, the main difference between contractors and freelancers is the scope of projects they engage in.

Typically, freelancers work on projects for multiple employers simultaneously. They are best suited for shorter and smaller-scope projects with well-defined goals. Common examples of freelancers include web designers, editors, and writers.

In contrast, contractors tend to work on one, longer-term project at a time. They also may work in-office or on-site more often than freelancers, depending on the nature of the work. Contractors are best suited for longer-term projects requiring some flexibility.

Contractors are common in the IT, construction, and business consulting industries, where a project may require an individual with certain skills to work for a set period of time, but not permanently.

What are the pros and cons of hiring an employee vs a self-employed individual?

Is hiring a self-employed professional right for your business?

To make the decision easier, you should know in advance the purpose for which you are hiring the worker.

For example, know whether you need them for a specific project, or for an ongoing engagement. Also, understand what skills and expertise are required to excel in the role, and outline your budget.

With that information, when making a decision between hiring an employee or outsourcing the work to a freelancer or contractor, consider the following pros and cons:

Advantages of hiring an employee

Employees are a part of your company culture, and contribute to the atmosphere of the work environment.

Deeper subject matter expertise

Unlike freelancers and even contractors, who have many different projects across their career, employees bring a narrower but more refined expertise to the table.

This deeper expertise is important because it increases the quality and depth of work the worker is capable of.

Employee training is an investment

While it is true that training employees is a large expense, this training directly contributes to their efficiency in the role.

Employees are effectively learning how to adjust and best apply their subject matter expertise to your particular business, and over time, this translates to a much more effective (and efficient) worker.

Better collaborative workflow

Employees typically work in-office and follow a regular work schedule, meaning that if they have a question with a task or need help with a project, they can quickly resolve it and move on.

Additionally, there are more opportunities for spontaneous collaboration, leading to more innovation and a higher productive output from employees.

Employees are also likely to feel more invested in your business, and hence more motivated to contribute directly to the company's success. Freelancers and contractors are typically primarily focused on retaining you as a client, orienting their goals on more short-term performance criteria.

Stronger work culture

Employees are a part of your company culture, and contribute to the overall atmosphere of your office / work environment.

The right employee will increase productivity not only by adding vital skills and experience to your team, but by bringing a sense camaraderie and support to the company culture.

Disadvantages of hiring an employee

Hiring quality talent can be challenging

A lot of the benefits a full-time employee brings depend on finding the "right fit" for your business - and this can be a lengthy, challenging, and oftentimes expensive process.

You can minimize this downside by investing into hiring the right candidate the first time around - avoiding shortcuts and taking your time to find the right employee will save you a lot in the long run.

Employees incur higher upfront and ongoing costs

Employees require more upfront training and typically incur higher costs throughout the employment relationship.

This is an important factor to consider, but don't forget about the intangible benefits of an employee - their deeper expertise, contribution to your work culture, and other factors may be difficult to quantify, but are still very valuable.

Advantages of hiring a freelancer

With freelancers, you can access a global network of professionals to find the worker that best suits your needs.

Easier project management

Freelancers are typically experienced in learning on the role, and know what questions to ask and where to look to find what they need to get your project started as soon as possible.

This experience makes managing a project a lot easier, as the freelancer or contractor takes care of a lot of the practical details - they answer the 'how' and 'when' of the project, and you just supply the 'what'.

Faster start

It can be difficult to anticipate when you will need new talent, such as when a new large client or a large project come up unexpectedly. In these cases, hiring external help is a quick way to provide your team with some much needed relief, and minimize project disruptions.

Lower risk

Unlike employees, self-employed professionals generally have no right to collect unemployment insurance or other compensation benefits upon termination.

After the contract is complete, it is much easier to terminate the relationship and replace the worker, or renew / change the terms, depending on your needs and how satisfied you are with the worker.

Cost efficiency

Despite their higher hourly rate, hiring freelancer or contractor is generally more cost efficient than hiring an employee, at least for discrete projects.

For example, unlike employees, self-employed professionals do not incur hidden costs such as recurring training, benefits plans, equipment/office space costs, income tax withholdings, etc.

Diversity of experience

As most self-employed professionals work remotely, you can access a global network of professionals to find the worker that best suits your needs and the requirements of your project.

There are also many online platforms which help you find professionals - just searching 'hire freelancer' on google brings up hundreds of very active and competitive platforms, making it easy and often free to list your project and find a freelancer with a combination of unique experiences that you are looking for.

Disadvantages of hiring a freelancer

Shallower contributions

Both freelancers and contractors are primarily focused on keeping you as a client - the company's long-term success is not a top priority. This may lead to a difficulty in tracking whether their work is truly paying off, or only appears to be.

There may also not be an opportunity for the individual to familiarize themselves with the company and project at a depth an employee would have.

For example, a freelance writer rarely has the time to get to know the business they are writing for in-depth, which may lead to a weaker product.

Limited scope of work

By their nature, freelancers and contractors are best suited for limited and well-defined projects.

As such, when the scope of a project grows, you may be required to bring on additional support, as the project may be beyond the worker's expertise, or they may be simply unable to take on the additional responsibility as they are busy with other clients.

Man looking at whiteboard
Did you consider all the important factors when deciding between an employee and a freelancer?

How to determine a worker's employment status

Usually, it will be very clear right away whether you are hiring an employee or working with a self-employed individual.

However, work relationships can become complex and unclear. Fortunately, The Government of Canada created an online guide to help you classify your workers.

If you are still unsure about how to classify a worker after looking at the guide and information below, you can get in touch with your accountant or lawyer to get more help.

You can also request an official CRA ruling to help you classify the worker - learn how at this link.

Key factors to help characterize an employee / self-employed individual

The list below is taken from the Government of Canada guide and is meant to help you get an idea of how to categorize the worker you are hiring. However, these factors do not replace an official assessment.

List of Employee traits

According to the Government of Canada, an employee is someone who usually:

  • Works exclusively for one company on a more permanent basis
  • Performs services which are controlled/set/overseen by employer
  • Is paid a salary, hourly wage, commission, or a combination thereof
  • Is paid vacation pay and provided pension and group benefits
  • Has work hours set by the employer
  • Reports to employer's workplace on a regular basis
  • Is provided tools by employer

Of course, this is not a comprehensive or absolute list - for example, a worker may qualify as an employee even if some of the points above are not met.

A worker also does not have to meet all the requirements to be considered an employee, although most employees will typically have most of these traits.

According to the Government of Canada, a self-employed individual is someone who usually:

  • Sets own working hours
  • Pays own expenses
  • Submits invoices for payment, usually on a predetermined basis
  • May accept or reject work
  • May hire someone to complete the job
  • Decides how tasks are to be completed
  • Provides their own tools
  • Is not allowed to participate in benefit plans, and does not receive vacation pay

While most self-employed individuals will meet most if not all of these points, there may be workers that fall in between the two categories, and classifying them may be more complicated.

Which choice is right for you?

We hope this guide helped give you an idea of some of the important differences between employees and self-employed individuals, but it is by no means comprehensive.

Ultimately, which hiring decision is right for your business depends on the scope of the role/project you are hiring for, the length of time you need the worker for, and the depth of expertise you require, among other factors.

Often, a combination of employees, freelancers, and contractors works best - each worker fulfills a niche that supports various aspects of the project in different ways.

For example, full-time employees may be supported by freelancers to complete various secondary tasks, and a contractor may help the team optimize their workflow to increase productivity.

Regardless of whether you decide to payroll employees or receive invoices from freelancers or contractors, a simple, automated cloud accounting system can help make the process effortless, leaving you to focus on your business. Let us help you set up a system which supports whatever work arrangement you choose, starting with a free consultation.

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